In 2017, the second phase of Azerbaijan’s Shah Deniz offshore gas field will come onstream and a race is on to snap up the roughly 10 billion cubic meters (bcm) of natural gas the new development is expected to generate every year for European consumption. Three competing European pipeline projects are preparing to submit their terms to Azerbaijan by October, but only one of them – Nabucco – has strategic potential for Europe’s energy supply.

Nabucco, a 3,900-kilometer pipeline that will bring Caspian gas to a hub outside Vienna, is backed by the European Commission as a core element of the EU’s strategy for security of supply. Construction is planned to begin in 2013. But to attain commercial viability, the project needs additional gas supplies: its first stage will have a capacity of 10 bcm, fed from Shah Deniz II, but its target capacity is 31 bcm. Meeting this level of supply has driven the EU to hold talks with Turkmenistan, where one of the world’s largest gas fields is located – but the talks have provoked controversy, because this is also one of the world’s most authoritarian, and opaque, countries.

Negotiations

Member states’ foreign and Europe ministers last Monday (12 September) agreed a negotiating mandate for the talks, in which the Commission, Azerbaijan and Turkmenistan will discuss the conditions governing future gas supplies to the EU’s southern gas corridor. Exploratory talks are expected to get under way in Poland – the current holder of the rotating presidency of the EU’s Council of Ministers – later this month. Uzbekistan, Iran, Iraq and Israel are other potential source countries.

Nabucco is, in several respects, ahead of its less ambitious competitors – the Interconnector Turkey-Greece-Italy (ITGI) and the Trans-Adriatic Pipeline (TAP), both of which are seen as more vulnerable to the political or commercial whims of non-EU transit states, whereas Nabucco has secured inter-governmental agreements between the transit countries. This has created a long-term regulatory regime for the gas transit through Nabucco, which, in addition, will be operated by a consortium of gas companies – Germany’s RWE, Austria’s OMV, Turkey’s Botas, Transgaz of Romania, Bulgarian Bulgargaz and MOL of Hungary.

Financial backing

Nabucco has also received the backing of the European Investment Bank, the European Bank for Reconstruction and Development and the International Finance Corporation, which will provide up to €4 billion in credit. However, draft budgets for all three projects are subject to change, given the volatility of gas prices.

Where ITGI and TAP have advantages over Nabucco is their reduced investment requirements – because they are more modest in scope and connect to existing pipelines in Turkey – and their less voracious appetite, so they can be sourced entirely from Shah Deniz II, without any politically sensitive outreach to other supplier countries.

The strategic context for Europe’s quest for reliable gas supplies is shifting just as these projects are taking shape. The shale-gas revolution in the United States has opened a new source of natural gas, while the economic downturn has depressed demand, leading to falls in prices. Gazprom, Russia’s de facto gas monopolist, now looks far more vulnerable to commercial factors than it did just a few years ago; the massive investment that would be needed to build the South Stream pipeline under the Black Sea, to compete with Azeri and Turkmen gas through Nabucco, now appears less viable.